Latvian SS commemoration

Has anyone else noticed how quiet the Kremlin propaganda machine has become as the March 16th anniversary approaches. I am writing on this for my online column this week but I have just come across this remarkable (to me) commentary on the normally vitriolic regnum.ru site, by Vlad Bogov, which gives a more-or-less balanced account of the issue. Has anyone else noticed this shift in Russian approach?

Estonia and defence spending

Why does Estonia spend so much more on defence than Latvia and Lithuania? And is it a good idea? Cynics say that Estonia can't be credible in defence if the other Baltic two have in effect given up. Estonia should stop bothering with even vestigial territorial defence and concentrate solely on international obligations. I think that would be a big mistake. Defence spending is about credibility, both in military and political terms. Trying to meet the 2% of GDP target shows the Estonian people that the state is serious about defence (and therefore serious about other things. It also signals that to the outside world. Here Kurt Volker, the former US Ambassador to NATO, praises Estonian defence thinking. And in this speech
he gives some general thoughts about the Atlantic alliance.

Latvia and Greece

Latvia and Greece

Baltic thaw, Aegean freeze

Feb 25th 2010 | RIGA
From The Economist print edition

Latvia’s economic free fall has halted, and it may now do better than Greece

DOOM-MONGERS are licking their wounds. For two years bankers have said that a Latvian devaluation was inevitable. The struggle to save the lat’s peg to the euro was bound to end in tears. And a panic in Latvia could topple the wobbly economies of Estonia and Lithuania, which have similar exchange-rate regimes, with repercussions extending across eastern Europe and to Scandinavian banks that lent recklessly in the Baltics.

Yet despite a fall in GDP last year of 17.5%, Latvia seems to have achieved something many thought impossible: an internal devaluation. This meant regaining competitiveness not by currency depreciation but by deep cuts in wages and public spending. In a recent discussion of Greece, Jörg Asmussen, a German minister, praised Latvia for its self-discipline.

Standard & Poor’s, a rating agency, has raised its outlook on Latvia’s debt from negative to stable (ie, it no longer expects further downgrades). The current account, in deficit to the tune of 27% of GDP in late 2006, is in surplus. Exports are recovering. Interest rates have plunged and debt spreads over German bonds have narrowed (see chart). Fraught negotiations with the IMF and the European Union have kept a €7.5 billion ($10 billion) bail-out on track, in return for spending cuts and tax rises worth a tenth of GDP.

At the centre of Latvia’s crisis was its biggest locally owned bank, Parex. Until it went bust, Parex was a byword for high living and murky dealings. Its new American-born boss, Nils Melngailis, has refinanced its debts, divided its assets into good and bad, and aims soon to unfreeze depositors’ cash. He found plenty of savings. Selling a fleet of sports cars and ending the use of private jets cut travel costs by 90%. Overall, he cut the bank’s costs by 40% in 2009, with 30% more to come.

Even if a catastrophe has been averted for the moment, Latvia’s economy remains troubled. Unemployment, at 22.8%, is the highest in the EU. Growth is unlikely to resume until late 2011. After a decade of prosperity based on a construction boom, cheap manufacturing and transit from Russia, Latvia needs new sources of income. The biggest task is to harness local brainpower. Emigration has been a safety valve for jobless Latvians, but the country loses if fraying public services, high taxes and low pay drive its more productive workers abroad. And nobody seems to be trying to stop them. Even his fans would hesitate to call the prime minister, Valdis Dombrovskis, charismatic or visionary.

Confidence in institutions is feeble—support for the EU is lower than in any other member state. Politicians are uninspiring, with most parties run by tycoons who escaped blame for economic mismanagement. A sense that the rich and powerful evade justice is pervasive. At Vincents, a Riga restaurant where dinner for two can cost $400, the owner, Martins Ritins, says business is booming. On Valentine’s Day he opened on a Sunday for the first time in years and almost every table was taken.

As politicians’ credibility dwindles, Russian influence grows. A pro-Russian party won control of Riga last year. Latvia’s president, Valdis Zatlers, will go to the Soviet-tinged celebrations in Moscow on May 9th to mark the 65th anniversary of Victory Day. Hawks see this as a sell-out. A visit to Riga by Russia’s foreign minister, Sergei Lavrov, in April may be a step towards normal relations—or a sign that Russia sees Latvia as a swing state in the Baltic.

Even so, Latvia looks good when compared with Greece. It did not lie about its public finances or use accounting tricks. Strikes have been scanty. Protests are fought in the courts, not the streets. Both Greece and Latvia have had hard knocks, but Greeks became used to a good life that they are loth to give up. Latvians remain glad just to be on the map.

europe view no 157--VVF for president!

Europe.view

An easterner to the front

Nov 5th 2009
From Economist.com

Could a former president of Latvia make it as the European Union president?

OPTIMISTIC Latvians are thin on the ground these days. The combination of fractious politics and a dismal economic outlook blunts the enthusiasm of even the most cheerfully patriotic soul. All the more reason, therefore, to applaud the announcement that the country’s former president, Vaira Vike-Freiberga, is running for the job of president of the European Union.

At first sight, Ms Vike-Freiberga’s chances seem vanishingly slim. And at a second glance they don’t look much fatter. On the plus side, she speaks perfect French. She is a woman. And she has no big enemies. Observers of Latvian politics in the years 1999-2007 (admittedly, not exactly a mainstream hobby in Brussels) remember her as an uncommonly effective president of that country. She proved a powerful bulwark against over-mighty tycoons bent on suborning Latvia’s independent institutions and a strong defender of probity in public office.

If big European countries cannot agree on a big personality from a big country, perhaps they might like a big personality from a small one (Ms Vike-Freiberga’s protocol-heavy grandeur is the stuff of legends among outsiders used to the laid-back style of other Baltic politicians). Her backers recall that she emerged from nowhere in 1999 after a deadlock between Latvia’s powerbrokers. Perhaps she could pull off the same trick in Brussels. Her life story—a refugee who fled the Soviet occupation in 1944, became a professor in Canada and then returned to usher her homeland into the EU and NATO—is captivating. She would bridge the gap between the eastern and western halves of the continent and talk to Barack Obama as one North American to another.Unlike some Baltic politicians, she is not detested in Russia (which matters, apparently). During celebrations in 2005 to mark the 60th anniversary of the end of the second world war she went to Moscow, while her Estonian and Lithuanian counterparts stayed away in protest at what they saw as Soviet triumphalism.

But anyone who overlooks the seemingly insuperable obstacles to her candidacy has probably been over-indulging in Black Balsam, Latvia’s hallucinogenic national drink (it tastes of burnt orange peelings). She has no serious backers, is all but unknown, and comes from a country that is widely regarded as an ill-governed basket case. Indeed, some fear that her candidacy may detract from the chances of Latvia’s real EU star, the energy commissioner Andris Piebalgs, gaining a serious portfolio in the new commission.

But Ms Vike-Freiberga’s Quixotic bid for high office does have two virtues. One is to show that Latvia has impressive public figures as well as the eccentric, inadequate and questionable ones that have tended to be on public display since she left office. That may be something of a morale-booster. Not many east European countries could boast a candidate of her calibre. The other is to highlight the continuing under-representation of people from the ex-communist countries in top jobs in international organisations. Whether in the higher ranks of NATO, the Organisation for Security and Cooperation in Europe, the European Central Bank, or the European Union, the easterners are conspicuous by their rarity or invisibility.

That is partly a matter of time (the post-communist generation will be better candidates than their parents), and partly the result of disunity, bad tactics and outright sabotage from the home side when an east European candidate does have a chance. But at least in part it also reflects an informal cartel among the countries of “old Europe” in dividing the spoils of office. If Ms Vike-Freiberga’s candidacy does nothing more than to shake that up, then it will have been well worth it.

Estonia ahead

Baltic economies

The Estonian exception
Oct 29th 2009 | RIGA AND TALLINN
From The Economist print edition


Estonia gets a boost, but worries persist about its Baltic neighbours
SMUGNESS is Estonians’ least attractive feature, at least in the eyes of their Baltic neighbours, Latvia and Lithuania. A surprise endorsement by the International Monetary Fund of Estonia’s plans to join the euro in 2011, coupled with gloom about the other two countries, will only make that worse.

All three Baltic states are facing double-digit economic declines in GDP this year, following the collapse of credit bubbles created by reckless lending and spending. Many outsiders have wondered if the three countries can maintain their fixed exchange rates, which peg the national currencies to the euro. A currency or banking collapse in the Baltic would spook markets elsewhere in the region, threatening wobbly economies such as Hungary’s.

So for the past year the focus has been on averting disaster. Plunging tax revenues made the chances of any Baltic states meeting the criteria for joining the euro look slim. In Latvia, for example, the government is struggling to keep next year’s budget deficit down to 8.5% (see chart)—a condition for the continuation of a €7.5 billion ($11 billion) IMF-led bail-out package. To join the euro, the deficit must be sustainably below 3%.



But it now looks as if, barring upsets, Estonia by the middle of next year will have met all the criteria for joining the euro. Inflation is low; government debt is negligible (indeed the country still has net public assets) and next year’s budget sets a deficit of 2.95%. That is thanks, the IMF says, to Estonia’s thrifty habits in public finances. The government has cut spending hard and early. It sped through modernisation projects financed by the European Union. This acted as an economic stimulus. Latvia and Lithuania have found it much harder to follow the same path. Lithuania has dodgy banks and spiralling debts; Latvia has lost credibility among outsiders because of its failure earlier this year to cut spending as promised.

For safety’s sake, the IMF still wants Estonia to raise and broaden taxes a little. Car-owners, for example, pay no car or road tax. But Andrus Ansip, the prime minister, already feels vindicated. He says the prospect of euro adoption will boost investors’ confidence and speed the country’s recovery.

Attention now shifts back to Latvia, where the IMF and EU are holding up a new budget, due to be passed on October 28th. They worry that the precarious governing coalition lacks political will, and that the crisis is unfairly hitting the poor. They want Latvia to dump its flat tax for a more progressive system. But Latvia says higher taxes would discourage entrepreneurs and that chaos in the state revenue office means that the higher rates would bring in little extra cash. No reason to feel smug there.

NATO and Russia

War games
Oct 29th 2009 | RIGA AND TALLINN
From The Economist print edition


Jitters in eastern Europe over Russia’s military manoeuvres

SCAREMONGERING is where defence-planning and politics overlap. Big military exercises in western Russia and Belarus, which finished earlier this month, were based on the following improbable scenario: ethnic Poles in western Belarus rise up and “terrorists” from Lithuania attack the Russian exclave of Kaliningrad. More than 10,000 troops from Russia and Belarus countered them, reinforcing Kaliningrad from the sea and sending special forces behind the enemy lines. Three NATO–like brigades, one visiting, one Estonian and one Latvian, then invaded western Russia, where they were successfully rebuffed by the elite Pskov-based 76th air assault division, reinforced by a motorised rifle brigade.

Military exercises need a notional enemy and, from Russia’s point of view, NATO is the obvious choice. Because the alliance has expanded to Russia’s borders, taking in a dozen ex-communist members over strenuous protests from the Kremlin, it is all the more desirable to send a strong signal. What is more, Western countries have been urging (and helping) Russia’s military forces to become more professional. That requires practice drills.

The main aim of the Russian exercises may indeed have been to measure progress on military reform, particularly the creation of more Western-style autonomous brigades. And, plainly, Russia is neither willing nor able to fight a real war with NATO. Yet the war-games look alarming to neighbours. They recall that the war in Georgia in August 2008 followed many years of exercises, and they point out that NATO has no formal contingency plans to defend its vulnerable Baltic members. Nor has the alliance held land drills on the territory of any of its new members. Indeed, until two years ago NATO’s threat assessments explicitly discounted the idea of conflict with Russia.

Russia faces many security problems within its borders, and its armed forces are still rusty. It is hard to see why preparing for an implausible armed attack from the West should be a priority; these days America and its allies have little time to rehearse big-war manoeuvres because their soldiers are too busy fighting, or training to fight, insurgencies in Iraq and Afghanistan. Similarly, the idea of Lithuanian-based “terrorists” invading Russia is risible.



Western military analysts have noted Russia’s use of destroyers and landing craft from the Black Sea and Northern Fleets to back up its feeble Baltic-based naval forces. They also noted the deployment of Russia’s most advanced S-400 air defence system in Belarus and a parallel drill conducted by the Strategic Rocket Forces, the guardians of the Kremlin’s nuclear arsenal. “The scope of the exercises, the weaponry used, the troops involved and the scenarios rehearsed all indicate unequivocally that Russia is actually rehearsing a full-scale conventional strategic military operation against a conventional opponent,” says a report by Kaarel Kaas, an analyst at an Estonian security think-tank, the International Centre for Defence Studies.

Dividing the exercise into a northern war-game (called Ladoga) and a southern one (Zapad-09) brought each below the 13,000-troop threshold at which Russia is obliged to invite outside observers. Some neighbouring countries were not able to monitor the manoeuvres (Lithuania, with a handful of observers in Belarus, was an exception). That does not build confidence.

From what outsiders can gather, the performance of Russian forces was patchy. A joint Belarusian-Russian headquarters worked poorly. Drones—a big feature of Western armies—seem to have been used mainly for show. Moving large numbers of troops and equipment around, a weakness during Russia’s war in Georgia, took too long.

Polish, Baltic and other officials will meet in Warsaw shortly to discuss the significance of the exercises. NATO will assess them next month. America certainly took careful notes: the USS Cole, a guided-missile destroyer, visited Estonia. NATO warplanes mounted a modest air exercise. A planned exercise in the Baltic states next year is likely to be beefed up, perhaps with the involvement of part of NATO’s new mobile Response Force.

Russia’s armed forces may be ramshackle, but many European members of NATO are in poor shape too. The alliance’s ability to defend the Baltic states depends almost wholly on American involvement. NATO hawks complain that members such as Germany and Italy are blocking attempts to draw up formal contingency plans for all its members—something that President Barack Obama has demanded. The doves retort that NATO’s Article 5, which says that an attack on one member is an attack on the whole alliance, is deterrent enough; new members who question its worth are hurting their own cause.

Yet easterners are raising their voices in talks about NATO’s new “strategic concept”, a document to define its purpose that will be adopted next year. With NATO focused mostly on the fighting in Afghanistan, they want a clear statement that old-fashioned collective defence of NATO territory is still a priority. Only that, they say, will convince their voters that, with Russia flexing its muscles nearby, sending troops to Afghanistan is worth it.

British Waffen-SS Legion? Not likely...

Europe.view

Unoccupied Britain

Oct 15th 2009
From Economist.com

It looks simpler from across the Channel

TWEAK history a bit. Imagine that in 1940 Hitler and Stalin divide Britain between them. Both occupying powers behave abominably but in different ways. After a rigged election, Scotland is declared part of the Soviet Union. Stalin imposes a one-party state and planned economy with a terrifying secret-police apparatus, liquidating normal life and decapitating the country. Tens of thousands of people—lawyers, teachers, businessmen, priests, journalists, and even philatelists—are woken in the small hours, given ten minutes to pack and then deported to slave labour camps in northern Norway. Few ever return.

South of the border, the Nazi military dictatorship rounds up England’s Jews, supported by local anti-Semitic collaborators. Industry is commandeered by the Nazi war machine. Anti-Nazi activity is lethal; thousands are shipped off to work as forced labourers. Others, disgracefully, even volunteer as concentration-camp guards and for auxiliary police battalions in the hope of gaining privileges or settling scores. Life is dire, but for most of the non-Jewish population it is much less awful than in the Scottish Soviet Socialist Republic.

In 1941 Hitler attacks Stalin. As the Red Army flees Scotland, Jews suffer terrible pogroms. Many Scots blame them, quite unfairly, for being allied with the communists. (In fact, though many Scottish communists are indeed Jewish, Jews feature prominently among the “bourgeois elements” deported to Norway). Many Jews die of starvation or typhus in the Glasgow ghetto. Most are gassed in death camps, some on British soil, some further afield.

As the Nazis start losing the war they conscript thousands of teenagers into a “British legion” of the Waffen-SS. About one-third of this unit are volunteers, desperate to stave off another Soviet occupation at least for long enough for their families to escape to neutral Ireland. Some have ardently helped the Nazis. Despite last-ditch resistance, Soviet power is restored in Britain by 1944, with implacable vengeance. A doomed underground army fights on (its last partisan is killed only in 1975). Britain regains its freedom only when the evil empire collapses.

Digesting that historical trauma would take time. Britons’ views of their country’s SS troops would probably be rather ambiguous: few would call them heroes, but few would condemn them outright either. Many British people might focus more on their own suffering than that of the all-but vanished Jewish population. Outsiders would do well not to jump to conclusions. Stereotypes linking the Holocaust in Britain to “endemic anti-Semitism” before the war would clearly be ludicrously simplistic.

Amid the current row about the Conservative Party’s new alliance with Poland’s socially conservative Law and Justice party and Latvia’s nationalist Fatherland and Freedom/LNNK party, British commentators would do well to bear some history in mind. Fatherland and Freedom (which has roots in the anti-Soviet dissident movement) says Latvian SS veterans have the right to pensions and public gatherings. Yet Jon Snow, a British television presenter, misleadingly dubbed the party “neo-Fascist”. Also on the same programme, he failed to challenge a British comedian, Stephen Fry, who deplored Poland’s history of “right-wing Catholicism”, terming it “deeply disturbing for those of us who know a little history, and remember which side of the border Auschwitz was on”.

Mr Fry is entitled to criticise Poland’s record on gay rights and the Tories’ choice of friends. But it is horribly unfair to mention Auschwitz (a death camp run by German Nazis in an occupied country) in the same breath. The million-plus Poles, both Gentile and Jewish, who perished there deserve better. And commentators from Britain, which escaped the war unoccupied, should try approaching other countries’ wartime history with more humility and less self-satisfaction.

Latvia (from Economist website

Ailing fast

Oct 7th 2009
From Economist.com


Bad news from Latvia raises fears of contagion across eastern Europe

THE patient emerges from intensive care, hurls the medicine at the doctors and bites his blood donor. That may be an unfair characterisation of the recent news from crisis-stricken Latvia, but it is pretty much how outsiders see it. The prime minister, Valdis Dombrovskis, is refusing to make the spending cuts mandated by international lenders and has floated a new law that would partially expropriate foreign banks’ loan books.

It would be worrying enough if the European Union’s weakest economy defaults, devalues or implodes. But what scares outsiders more is the effect of Latvia’s latest wobble on other ex-communist economies, which until this week seemed to be surviving the financial crisis with less trouble than some had feared.

In recent weeks, the news from Latvia had seemed mildly encouraging, after a year during which the country has been kept afloat thanks to an $11.1 billion international bail-out. The breakneck decline has slowed: the economy is expected to contract by 17.5% this year, but by only 3% in 2010 and to return to growth in 2011, according to a forecast by SEB, a Swedish bank (and big lender to Latvia). The current account, which showed a yawning deficit of 1.42 billion lats ($3 billion) in the first seven months of last year has been transformed to show a 581m lats surplus in the same period of 2009.

The main outstanding issue is next year’s budget deficit. International lenders had softened the target to a mere 8.5% of GDP; the government still had to push through spending cuts of 500m lats to meet this.

But this week Mr Dombrovskis startled outsiders by saying that cuts of only 225m lats would be necessary. He has pencilled in a further 100m lats in better tax revenues—counting, apparently, on a faster economic recovery than anyone expects. The hesitation has brought stern warnings. Sweden’s finance minister, Anders Borg, said outsiders’ patience was “limited”—his country is due to provide SKr10 billion ($1.45 billion) in a loan tranche in early 2010. The EU’s monetary affairs commissioner, Joaquín Almunia, has publicly rebuked the government too. Mr Dombrovskis has now backtracked, saying that if the cuts are necessary, they will be made.

But doubts remain. Mr Dombrovskis lacks the authority to push tough measures through parliament and his public wobble could be seen as an attempt to summon up another burst of international pressure on the government to do the right thing. If so, it is risky.

The same could be said about another of Mr Dombrovskis’s moves—calling for a draft law that would restructure domestic assets of foreign banks. Borrowers would be liable only for the collateral value of their loan (eg, a house bought with a mortgage) rather than the whole amount. Banks would also be unable to evict defaulters from their homes without rehousing them. A fall in property prices of over 50% has sent Latvia’s private-sector debts to foreigners ballooning. They will need restructuring eventually. But this proposal looks unworkable, clumsy and damaging. Shares in Nordic banks, which have been the biggest private-sector lenders to Latvia, dipped on the news.

If Latvia fails, with a strike by international lenders prompting a debt crisis or a bank run, the spotlight then turns to the neighbouring Baltic states of Estonia and Lithuania. They are not in the same political mess, but both have also pegged their currencies to the euro and are facing huge and painful adjustments. Some wonder if the EU might accelerate its recognition of Estonia’s impressive progress in sorting out public finances by giving it early approval of its plans to join the euro in 2011. But where would that leave Lithuania, which is nowhere near balancing its books and borrowing expensively from private lenders instead of turning to the IMF?

An even bigger question involves the future co-operation between the IMF and EU. They worked together closely during the emergency rescue of Latvia in December. Now ties are strained: the IMF thinks Latvia should devalue its currency. EU officials are determined that it should not, for fear of the wider effect on ex-communist countries that are trying to join the euro zone. That has led the EU to squeeze the IMF into accepting softer conditions on Latvia than it would have wished for. For all those involved, in Brussels, Washington, DC, and Riga, patience is running out.

Baltic turnaround?

Baltic economies

Feeling a bit fragile

Sep 24th 2009
From The Economist print edition

A Baltic meltdown has been averted, but the gloom may yet last a bit longer

WORRIES about a financial meltdown across eastern Europe have receded, thanks to generous outside support, some canny policies and the start of a recovery in western Europe. Poland, the region’s biggest economy, has managed to avoid recession altogether. But even the worst-hit countries are breathing more easily.

This week Moody’s, a rating agency, noted a “fragile stabilisation” in the three most vulnerable: Hungary, Latvia and Iceland. Some mildly encouraging signs are visible. Thanks to plunging imports, and foreign investors refinancing local subsidiaries, Latvia’s second-quarter current account showed a surplus of 14.2% of GDP. A year ago it was a 15.1% in deficit. The economy shrank by a grim 18.7% year-on-year, but the worst seems to be over and some industries are picking up.

The slowdown has hurt the banks, which have lost nearly $1 billion this year. That is a big hit for the shareholders, mainly Nordic, whose managers lent so recklessly. But contrary to expectations, only one big local bank had to be rescued and nobody has pulled out. Doomsters who forecast bank runs and devaluation in Latvia (followed by Estonia and Lithuania, which also have currencies pegged to the euro) have little to show for their gloomy prophecies.

Yet Latvia, in particular, is still in an economic and political mess. It survives because outside lenders, chiefly the European Union and the IMF, think it worth propping the country up with smallish loans (by bail-out standards). The European Commission lent €1.2 billion ($1.8 billion) in July, following an IMF-led €7.5 billion agreement in December. In theory, the money is conditional on spending cuts and tax rises. The IMF agreed, reluctantly, to a budget deficit of 8.5% of GDP in 2010, down from 10% this year. The measures have been striking: some civil servants’ pay is down by a third. But that followed big rises during the boom years.

The real shortcoming is that Latvia’s squabbling politicians have ducked deeper changes in the public sector and the civil service. The People’s Party, supposedly part of the ruling coalition, says it may block a planned property tax. The government promised its lenders it would implement this, but it has to secure support in parliament. Some senior politicians in the People’s Party want to swap the currency peg for a band. The EU’s monetary affairs commissioner, Joaquín Almunia, lectured the Latvian prime minister, Valdis Dombrovskis, recently about the need for “national consensus” behind the austerity plan. But the prime minister cannot crack the whip over his coalition’s powerful party chiefs, who prefer carping about government policies to voting for them.

Outsiders find Latvia’s politicians unimpressive and exasperating. But they are unwilling to cut the country adrift or to push it into a devaluation. Turmoil in Latvia could easily spread to the neighbours, or even to Hungary (see article). Latvia’s biggest asset is its neighbours’ popularity, says one weary international banker. Foreign money may plug the public finances for a bit and so avert disaster. But it is not a recipe for prosperity. Latvia did not solve its growth-choking problems, such as corruption and poor public services, when times were good. Nor is it solving them when they are bad.

Foreign Policy magazine (2)

Welcome to Baltland
In Russian, the Baltic states are called pribaltika—literally, the "Baltic shore." That infuriates Estonians, Latvians, and Lithuanians, as do most other attempts to lump them together. Estonians are the prickliest: Toomas Hendrik Ilves, now president, angered his southern neighbors by saying that Estonia should be more fairly counted as a Nordic country, not a Baltic one. That was tactless. But in truth, the differences are legion and the similarities—barring one chunk of tragic 20th-century history—scant.

In Estonia and Latvia, national consciousness began only in the 19th century with the emancipation of serfs, the growth of literacy, and the stirring of resentment against German barons and tsarist rule. Not so in Lithuania. Its identity is shaped by a folk memory of superpower status. The Grand Duchy of Lithuania, the last pagan state in Europe until 1387, once stretched to the shores of the Black Sea. It was larger than the Holy Roman Empire and had six official languages. Now the size of West Virginia with only 3.7 million people, Lithuania has shrunk. But its sense of grand identity remains. In any intra-Baltic discussion, Lithuania tends to lead with a grandiose self-centered plan, often with a blithe disregard for practicalities. In March 1990, for example, Lithuania mounted a frontal attack on the Soviet Union and declared independence; Estonia and Latvia, by contrast, initially held back and only declared "sovereignty."

The three countries also have different foreign phobias. Anti-Semitism has plagued Latvia and Lithuania, but not Estonia. Russia and Russification worry Estonia and Latvia more than Lithuania, which is instead twitchier about Poland. It has clashed with Poland repeatedly over the city of Vilnius (Polish-occupied in the interwar years) and in recent years over whether their respective minority populations can spell their names in official documents with letters such as ? (which exists in Polish but not the Lithuanian alphabet) or "?" (a Lithuanian letter nonexistent in Polish).

The three states have struggled, literally and figuratively, to find a common language. Older people speak Russian, usually badly in Estonia and rather well in Lithuania. Younger people speak English, often quite proficiently in Estonia and somewhat more rarely in Latvia and Lithuania. Almost no Baltic country studies or speaks the languages of the others. A Lithuanian diplomat once told me, "It is easier for us to find a Chinese speaker than an Estonian speaker."

Life under Soviet rule was different, too. Some Lithuanians were able to watch Polish television—a huge excitement during the 1980-81 Solidarity era, and always more informative than Soviet propaganda. Similarly, from the early 1960s on, Estonians in the north of the country were able to receive Finnish television, which broadcast subtitled foreign films and documentaries: a vital window into the real world. Finns also flooded into Tallinn on cheap, visa-free booze cruises. Estonians referred to them derisively as "moose" (because, as an Estonian woman once told me, they are "large and noisy, with clumsy mating habits").

The differences between the Balts are arcane and sometimes amusing. But they matter. Estonia's Nordic-style thrift, openness, and careful planning have proved almost ideal for the post-communist years. It was the wealthiest of the three before the occupation, and it is still the leader. But its smugness-the big weak point-has now let it down badly. Latvia's more diffuse identity has perhaps meant weaker bonds between state and society, which has allowed corruption to flourish and prevented a speedy response to the crisis. Lithuania's headstrong "we do it differently" approach has repeatedly cost it time and friends, but the lag spared the country the spending frenzy that has cost the other two so dearly.

Relations will never be as close as, say, between Estonia and Finland. But sibling rivalry has its virtues. It encourages innovation-what one country invents, the others can copy. And each country is determined to be the first to emerge from the crisis.

MAP BY KATHERINE YESTER

Edward Lucas is a senior writer at The Economist and author of The New Cold War: Putin's Russia and the Threat to the West.

Latvia

Latvia's economic woes

Lat in the lurch

Jun 11th 2009 | RIGA
From The Economist print edition

Vultures are circling over Latvia

LIKE many small countries, Latvia has struggled to attract outsiders’ attention. Now it is famous, and hating it. The economic contraction—GDP down nearly a fifth, imports and exports down by more than 40%—is on a scale rarely seen in peacetime. Life support for the economy is being given by outsiders. Foreign banks are nervous (see article). Much depends on parliament accepting more big budget cuts: nearly $1 billion this year and the same next year. The package includes ditching the flat tax on incomes. The government agreed to this new budget, belatedly, on June 8th.

That should unlock the next $1.67 billion tranche of aid from the European Union and the IMF, part of a $10.6 billion deal from late last year. But is it throwing good money after bad? Some bits of good news suggest that the economic collapse may have halted. Latvia’s flexible economy means it may manage painful reforms that amount to an “internal devaluation”. That could regain lost competitiveness and restore growth.

Others think that Latvia must sacrifice the peg to the euro that has been the centrepiece of economic policy. The Bank of Latvia has spent over a tenth of its reserves in the past fortnight propping up the lat. Interest rates have spiked, and a government debt auction failed last week. Sweden’s central bank is borrowing €3 billion ($4.2 billion) from the European Central Bank, in case it needs to shore up Swedish banks that lent in Latvia. Past crises in Latin America and East Asia echo ominously. Bengt Dennis, a Swedish adviser to Latvia’s government, says devaluation is inevitable.

But the lat’s guardian, the Bank of Latvia’s governor, Ilmars Rimsevics, is unshaken, pointing to the “beauty” of the currency-peg system. All lats in circulation are backed by euros. If people want to switch, they can, but as interest rates rise, holding lats becomes more attractive, he argues. The central bank’s independence from government is legally impregnable.

Joaquín Almunia, the EU’s monetary affairs commissioner, backed the peg this week. But political weakness still overshadows Latvia’s chances. The steely (critics say arrogant) Mr Rimsevics is barely on speaking terms with the prime minister. Latvia’s real deficit is not in the public finances but in the state’s credibility, squandered in the past by spendthrift and sleazy politicians.

Baltic economics

[sorry for lack of activity. I am taking longer than expected to get over my hospital excursion]

The troubled Baltics

Still afloat in the Baltic, just

Apr 8th 2009 | TALLINN
From The Economist print edition

The three Baltic economies face a spiralling economic downturn

ONCE the fastest-growing economies in Europe, the three Baltic countries are now the opposite. Latvia, which in December received a €7.5 billion ($10 billion) bail-out led by the International Monetary Fund, is basing its budget on a 13% decline in GDP. Estonia and Lithuania expect a decline of a tenth. A conventional response might be devaluation and fiscal stimulus. But the Baltics’ currency pegs to the euro are a matter of national pride. Moreover, most private borrowing is in euros, so devaluation would mean beggary for many. Instead, the response has been wage cuts meant to regain competitiveness.

Fiscal stimulus is tricky too. Estonia ran a budget surplus during the boom, so has some room for manoeuvre, but even it can risk only a deficit of 3% of GDP permitted by the rules for joining the euro. All three countries want to adopt the single currency as soon as possible, though not by bending the rules: the whole point is to gain credibility, not to enter the club “on a stretcher”, as one official puts it. But as economies shrink, it gets harder to meet deficit targets. Latvia’s new government has been haggling over a 5% ceiling agreed with the IMF, missing last month’s €200m instalment of the bail-out as a result.

The Baltics have no shortage of external support. The European Bank for Reconstruction and Development this week agreed to bail out Parex, a Latvian bank. The IMF has more money to help. But the economic adjustments are still unimaginable in old Europe. Having soft-pedalled reform after joining the European Union, the Baltics now have to make up for lost time, in a climate where they are perilously exposed to the global downturn.

Belatedly, some progress is visible. Inflation and current-account deficits are falling. Latvia has begun unpicking a network of sinecures in nationalised industries. But overdue reforms such as simplifying local government in Estonia are still on hold. Yet compared with the polarised politics and debt-soaked economy of Hungary, the Baltics’ outlook is not bad. None of the three is much exposed to the international financial markets. Their stocks, bonds and currencies are thinly traded. Most of their external debt is owed by local bank branches of Swedish parents. Bits of those loan books have soured, particularly in property and construction. But other parts are still sound. So long as the Scandinavian banks stand by their investments, the Baltics should be all right.

Public protests have been muted and peaceful except for two bust-ups in Lithuania and Latvia. Estonia’s politics look the most solid, with a well-regarded coalition government. Latvia’s government, in office for just a month, is more broadly based than its predecessor and has shed some incompetent figures. Lithuania faces a presidential election in which the front-runner is the EU budget commissioner, Dalia Grybauskaite. Her financial skills may soon be tested, since after the election Lithuania may well turn to the IMF for help.

Belatedly, some progress is visible. Inflation and current-account deficits are falling. Latvia has begun unpicking a network of sinecures in nationalised industries. But overdue reforms such as simplifying local government in Estonia are still on hold. Yet compared with the polarised politics and debt-soaked economy of Hungary, the Baltics’ outlook is not bad. None of the three is much exposed to the international financial markets. Their stocks, bonds and currencies are thinly traded. Most of their external debt is owed by local bank branches of Swedish parents. Bits of those loan books have soured, particularly in property and construction. But other parts are still sound. So long as the Scandinavian banks stand by their investments, the Baltics should be all right.

Public protests have been muted and peaceful except for two bust-ups in Lithuania and Latvia. Estonia’s politics look the most solid, with a well-regarded coalition government. Latvia’s government, in office for just a month, is more broadly based than its predecessor and has shed some incompetent figures. Lithuania faces a presidential election in which the front-runner is the EU budget commissioner, Dalia Grybauskaite. Her financial skills may soon be tested, since after the election Lithuania may well turn to the IMF for help.

East European economies

To the barricades
Jan 22nd 2009 | VILNIUS
From The Economist print edition


Economic pain brings political ructions

IN INTENSIVE care but angry: that describes Latvia’s economy after its dramatic rescue by the IMF and other foreign lenders. Now the question is whether the tough conditions imposed by the bail-out are politically tolerable. A riot in Riga, in which more than 40 people (including 14 police officers) were hurt and 106 arrested, suggests there is a bumpy ride ahead.

Latvia, a country of 2.4m that may soon be the sixth-biggest debtor to the IMF, is not alone. Lithuania has pushed through similarly tough wage and spending cuts and tax rises. A protest on January 16th turned violent, with protesters pelting the police with snowballs and stones. After a decade in which breakneck growth made up for political weaknesses, pessimists fear that the post-cold war settlement across eastern Europe may now be at risk.

That settlement rested on three notions. One was that Western-style politics was both trustworthy and efficient, in contrast to the failures of communism. The second was that welfare capitalism and integration into Western markets would produce prosperity. And the third was that joining the European Union would provide a guarantee of economic and political security. All three now look wobbly.

In 2006 Latvia’s economy was still growing by an astonishing 12% a year. One reason was that locally owned banks—comprising some 40% of the financial system—took deposits from foreigners (chiefly Russians) and invested in an increasingly frothy property market. The government not only failed to supervise them properly. It also inflated the bubble by running a loose fiscal policy.

The biggest local bank, Parex, collapsed and has been largely nationalised. Outsiders going through the books are finding much to be glum about. At worst, the Latvian taxpayer faces a bill of up to $3 billion. Even at best the country faces several painful years as it tries to regain competitiveness. Such pain may have been tolerable after 1991 when problems could be blamed on communist times. Nobody knows where public anger will focus now.

The IMF and others believe that the best solution would have been immediate devaluation of the national currency, the lat, accompanied by its replacement by the euro. That would have hurt the many households and businesses that have borrowed in foreign currency. But calculations published by the IMF suggest that the recovery thereafter would have been quicker and steeper.



Yet euroisation has proved impossible. The European Central Bank and the European Commission were unwilling to change their rules. And the overwhelming consensus in Latvia favours keeping the lat’s currency peg. Neither the protesters in Riga nor opposition politicians want a devaluation. Their most controversial demand is for a progressive income tax (Latvia, like its neighbours, has a flat tax).

Ainars Slesers, the transport minister, is suggesting legal action to protect creditors of the Nordic-owned banks that make up most of the rest of the financial system. He blames their irresponsible lending for stoking the boom. Yet it is only foreign banks’ willingness to stump up for their losses that is keeping Latvia afloat. Shares in Nordic banks such as Swedbank and SEB have plunged because of worries about their exposure to bad Baltic loans.

Latvia’s prime minister, Ivars Godmanis, is widely seen as a competent heavyweight. But he depends on powerful political barons such as Mr Slesers to support his governing coalition. The president, Valdis Zatlers, wants a cabinet shuffle to dump discredited figures. Failing that, an early election in the summer looks likely. Yet Latvia’s opposition parties are a motley lot; and no policy mix can now avoid economic pain.

Most other east European EU members are in a better way, at least for now. Estonia was more prudent during the boom, building up net public assets equivalent to 7% of GDP. It can now run an expansionary fiscal policy that offsets the recession, rather than a tight one that aggravates it, as in Latvia and Lithuania. Estonia’s banks are almost all foreign-owned. Even Lithuania’s dodgiest local bank is nothing like as troubled as Parex in Latvia.

Not that the foreign-owned banks are in great shape. Across the region cash-strapped banks are cutting business loans, worsening the downturn. No international or national institution has the authority to deal with banks that take deposits in one country and lend in another, often with managers in a third country and shareholders in a fourth. Neither the IMF nor the ECB is set up to deal with these beasts.

The biggest concern is how far the economic weakness will spread. Poland, the biggest regional economy, has looked fairly safe. The central bank has even cut interest rates sharply, after raising them in 2008. But industrial production is plummeting, with inevitable effects on tax revenues. By the summer the government will have to choose between maintaining a tough fiscal stance (a condition for joining the euro) and easing the pain of recession. At least Poland has a choice. Hungary, the most indebted country in the region, has little option but to tighten its belt further.

Governments normally respond to recession by loosening fiscal policies to preserve jobs and output. But most in eastern Europe cannot do this. Their debts make it hard to borrow more. Currency pegs in the Baltics and Bulgaria that once seemed to offer stability and a smooth path to the euro now put the burden of adjustment wholly on wages and output. The voters, many of whom suffered gas cut-offs in Russia’s gas spat with Ukraine, won’t like it. What will they do? Nobody knows.

Europe View on "December Heat"

Feeling the pinch
Jan 22nd 2009
From Economist.com


Uncomfortable echoes of uncomfortable times

“ECONOMIC collapse undermines national security”. Two years ago, when the script for “December Heat”, Estonia’s lavishly produced new historical thriller, was being written, that seemed a theme from the past, not the future. Now it looks uncomfortably prescient—if not yet for Estonia, certainly for its southern Baltic neighbours Latvia and Lithuania.

“December Heat” portrays the failed Bolshevik putsch in Estonia in 1924. Some elements are unlikely to be repeated. Communism then could attract idealists hoping to build a workers’ paradise. It is hard to imagine starry-eyed young Estonians now believing that modern Russia is a new civilisation. The Baltic states are in NATO and the EU.

But other elements are all too topical.

The film shows that economic hardship has discredited the idea of independence in the eyes of many. Children beg on the streets. Public servants are poorly paid. Private business is struggling. People are cold. A few tycoons have done well and are widely disliked for it. All of that sounds pretty familiar.

So does the political backdrop of the early 1920s. The politicians don’t seem to have a grip on the situation. Officials are indecisive and possibly treacherous. And although Estonia, Latvia and Lithuania are far better guarded than they were then, territorial defence has taken second place to NATO’s overseas commitments. It would require several hundred well-equipped coup plotters, not a few dozen with small arms as in 1924, to seize key buildings in the capital city. But with the right support from outside, it is not impossible.

Similarly, you can no longer take over a country’s international communications simply by sending few toughs with guns into the telegraph exchange and railway station. But as the events of April 2007 showed, a cyber-attack can have roughly the same effect without firing a shot.

This is good material for a lively if rather melodramatic film. Only quick thinking and bravery by the protagonist, the stalwart Tanel Rõuku (played by Sergo Vares), with his nubile and equally valiant wife Anna (played by Liisi Koikson) save the six-year-old Estonian republic from disaster. They are assisted by the true hero of the events, General Ernst Põdder, (a real historical figure, played by Tõnu Kark). He happens across the coup plotters while returning from a late-night drink and leads an impromptu posse to raise the alarm. The final scene, in which the plotters’ telegram “inviting” fraternal assistance from the Soviet troops massed across the border is foiled in mid-sentence, is both exciting and amusing.

The troubling question for today’s audiences is about the differences between then and now. Politics in the 1920s was pretty shambolic in the Baltic states (which is one reason that all three countries, like the rest of central Europe, descended into semi-authoritarian rule in the 1930s). Opinion polls of today’s type didn’t exist, but it is a fair bet that voters then thought as little of their squabbling, incompetent politicians as their current counterparts do. Until recently, a big difference would be the magnet that Euroatlantic integration has provided to all post-communist countries. But divisions in the EU and NATO, and the huge dents that the crisis has left in the “western model” of political freedom and welfare capitalism, mean that this magnet’s pull is now weakening. In Latvia and Lithuania, political protest has spilled over into sporadic violence.

So the big question is about Russia. For all its faults, the ex-KGB regime in the Kremlin now is hardly comparable to the ruthless Bolshevik ideologues of the 1920s. Yet the lingering worry remains. Prosperity made independence seem successful and permanent after 1991. What will economic hardship bring?

Latvia on the brink

Latvia's troubled economy

Baltic brink

Dec 18th 2008
From The Economist print edition

Latvia has chosen economic torture over complete collapse

ONE of the more dramatic and controversial financial rescues in modern European history has been taking shape in Latvia over the past three weeks, led by officials from the International Monetary Fund and backed by neighbouring countries, the European Union and other institutions. Latvia’s central bank has burned through €1 billion ($1.4 billion), around a fifth of its reserves, since mid-October to defend the national currency, the lat. This is pegged to the euro in an arrangement similar to a currency board, but with an even bigger lump of foreign currency to back local money in circulation. As a stopgap measure, the Swedish and Danish central banks this week offered a combined €500m in short-term swap facilities, allowing the central bank to keep exchanging lats for euros. The IMF-led bail-out—so far agreed only in outline—is likely to amount to over €7 billion, with contributions from the Fund, Nordic countries and Latvia’s Baltic neighbour, Estonia.

The deal does not require Latvia to devalue its currency. This is highly controversial inside the IMF, where memories of the debacle over Argentina’s abandonment of its currency board in 2002 are still painful. But ending the currency peg would be tricky, not least because the central bank’s independence is constitutionally entrenched. It would bring little lasting benefit. And it would be deeply unpopular. Some 85% of loans to Latvian households and firms are denominated in euros and other foreign currencies.

The clinching argument was the damage that a devaluation could wreak elsewhere. Swedish and Finnish banks, which own the bulk of Latvia’s banking system, could find their own creditworthiness suffering. Although total exposure to Latvia is still small, the perception of risk is damaging. In late October, the Swedish government launched a loan guarantee plan of SKr1.5 trillion ($190 billion) to allay fears about its banks’ future.

A Latvian devaluation would also be likely to topple the currency boards of Estonia and Lithuania, and to endanger the precarious stability secured in recent weeks in other wobbly east European countries such as Hungary. The IMF said this week that it did not believe that either Estonia or Lithuania needed to abandon their currency boards. However, big current-account deficits there and in other east European countries remain a worry.

The bail-out plan makes unprecedented demands for fiscal adjustment to trim both the current-account deficit and inflation. After some years of double-digit growth (during which a complacent government signally failed to cool the economy), Latvia faces a 5% or greater contraction in GDP next year. The tax rises and spending cuts that have been agreed upon are worth a full 7% of GDP. Public-sector salaries will fall by 15%. Private employers are making deep wage cuts too.

Latvia’s flexible economy may fare better than the political system, which is notable for fragmented parties, squabbling mediocrities, dodgy business lobbies and abuse of power (the security police briefly arrested an economics lecturer who urged people to keep their savings in foreign currency in cash). The prime minister, Ivars Godmanis, is a heavyweight, but lacks a competent team. This matters as the plan calls for big structural changes, including thorough reform of the financial system. The crisis was precipitated by the near-failure of a locally owned bank, Parex, which enjoyed a lively offshore business taking deposits from Russians, some of which appear to have been lent, unwisely, to locals. Having pushed the central bank into printing 200m lats ($390m) to support Parex, the government is now nationalising it.

Assuming that the bilateral elements in the plan are finalised, it may yet be agreed upon at an IMF board meeting shortly before Christmas. Any delay risks creating new room for speculators to try to attack the currency, and for locals to panic and turn more lats into euros (after some unwise remarks by the finance minister about a possible devaluation, the central bank lost more than €100m in reserves in a single day). Negotiating the plan has involved hectic late-night sessions in which outside officials have given locals copious instructions on the details of reform measures and the lobbying needed to gain support for them. It seems to have worked. But only for now.

CEE Economics/Romania-Bulgaria

Eastern Europe’s woes

Stopping the rot
Nov 27th 2008
From The Economist print edition


East European economies crack, with Romania and Bulgaria the worst off

JUST another week’s news in eastern Europe: Latvia, after vehement denials, starts talks with the IMF; Bulgaria loses €220m ($286m) in promised payments from the European Union because of its failure to tackle corruption; and the European Bank for Reconstruction and Development cuts its growth forecast for the region by half. But the good news is that worries of a huge meltdown, from the Baltic to the Black Sea, now look overblown.

The most likely outcome is several years of low or no growth, with bigger hiccups in countries that have the shakiest financial systems and biggest imbalances. The outside world (ie, the IMF, the EU and the European Central Bank) is ready to help when necessary and—more usefully—even before problems hit markets. The ECB has opened a €10 billion credit line to Poland, which saw its currency, the zloty, fall sharply earlier this month. Hungary’s central bank was even able to cut its interest rates by half a point from the 11.5% rate that it set last month, as part of a $25 billion international bail-out. And foreign banks have stood by their subsidiaries in the ex-communist countries. It was their risky lending that inflated the property bubbles, now popped, and also financed huge current-account deficits in such places as Latvia and Bulgaria.

The biggest worries are now focused on Bulgaria and Romania, the poorest and worst-governed new members of the EU.

The Bulgarians have their hands tied by a currency board that pegs the lev rigidly to the euro. That rules out devaluation to restore competitiveness, which is a concern as exports sag. It also removes a potential buffer, because the central bank cannot adjust interest rates. A current-account deficit worth a quarter of GDP looks alarming.

At least Bulgaria’s fiscal position is strong. The state has little foreign debt and runs a budget surplus. That should allow it to increase public spending as the economy slows. It can also borrow abroad (though the authorities say they have no plans to approach the IMF). The loss of some EU money is embarrassing, but Bulgaria is still in line to get €11 billion in the years up to 2013. Oriens, a Hungarian-based merchant bank that specialises in the Balkan region, reckons that growth next year will be 2.3%: low but not awful.

Romania has a current-account deficit of only 14% of GDP; a floating currency that gives it more flexibility; and is less dependent on exports to the slowing euro area than Bulgaria. But it may have a harder landing. Oriens forecasts GDP growth of just 0.9% next year. Its banking system is less profitable than Bulgaria’s. Although it is mostly foreign-owned, it looks wobblier; inter-bank rates have nearly doubled this year to 15%. Foreign reserves are scantier and the IMF reckons that the currency, the leu, may be overvalued by 19%.

Thanks to populist spending in the run-up to this week’s parliamentary election, the budget deficit may reach 3.9% of GDP by the year-end. That is not a lot by some standards, but it may still cloud outsiders’ willingness to provide more cash. Whatever coalition the election produces, serious reform is a long way off. Bulgaria’s politics are also troubling. Politicians’ ties to organised crime remain scandalous; the main populist party seems to blame the country’s Turkish minority as the economy slumps. Meltdown may have been averted, but the eastern Balkans still face bleak times ahead.

Smouldering

Eastern Europe
Nov 6th 2008 | RIGA
From The Economist print edition


The ex-communist economies have been steadied. Deeper worries remain

How much will you give me to stop playing?

FLAMES out, but smoke still rising. That is how eastern Europe looks after huge outside intervention to douse worries in debt and currency markets. An IMF board meeting on November 5th approved a lightly conditioned $16.5 billion bail-out for Ukraine. Austria has offered a €100 billion ($129 billion) package for its banks, which are owed $290 billion by east European borrowers: Erste Bank took up a €2.7 billion equity injection on October 30th. In Hungary, which has also received an IMF bail-out, markets firmed as parliament passed a tough fiscal package, based on an expected 1% fall in GDP. Serbia, which is in talks with the IMF, said it would not need extra cash, though it might draw on its $695 billion deposit at the fund.

In London Latvia’s central-bank governor, Ilmars Rimsevics, sought to quell fears that his country faced a meltdown on Icelandic lines.

Flanked by representatives of Swedbank and Nordea, two Nordic banks which own a large chunk of the local banking system, he said Latvia’s currency peg to the euro was not in doubt. Unlike Iceland, Latvia has little external public debt and a thinly traded currency. But questions remain over some locally owned banks and the legacy of reckless fiscal policies (described by one minister as “hitting the gas pedal”). That brought double-digit growth, but did little for competitiveness. The coming months could bring a contraction of up to 5% in Latvia’s GDP.

The intricacies of Latvian economic policy may no longer hold foreigners’ attention. “We were getting a lot of calls about the Baltics and Scandinavian banks a couple of weeks ago. Now attention has shifted to Bulgaria,” says Neil Shearing of Capital Economics, a consultancy. Bulgaria has a large current-account deficit (expected to be 24% of GDP this year). So far, this has been filled by inflows of foreign direct investment. That looks good on paper (it is reliance on short-term borrowing that sets red lights flashing). But up to a third of that money went into property, inflating a bubble that has now popped.

Neighbouring Romania, the poorest country in the European Union, has problems too. Standard and Poor’s, a rating agency, downgraded its debt to junk last month. And the slowdown in “old Europe” will hit remittances from the many Romanians working abroad.

Foreign investment flows to eastern Europe may be shrinking too, now that businesses in the rich half of Europe have less cash to spare for foreign expansion. Having neglected competitiveness-stoking reforms in education, infrastructure, and public administration, ex-communist countries may find it harder to attract companies needing to cut costs. Governments in eastern Europe are now hurrying to adopt the macroeconomic policies necessary to speed the adoption of the euro. But their countries’ deeper problems remain.

Daily Telegraph rant today

Russia, Georgia and the EU: Victory for the Kremlin?

Britain's shameful U-turn on Russia is alarming many in Eastern Europe, says Edward Lucas

So it is business as usual with Russia. And what a bad business it is. Britain's decision to allow France to lead the European Union back into normal relations with Vladimir Putin's ex-KGB regime in Russia is one of the most startling volte-faces in our country's recent diplomatic history. It has left our allies in Eastern Europe – Poland, the Czech Republic, Estonia, Latvia and Lithuania – aghast at our duplicity. "Our last European hope just ----ed us. We should have known. For we are but a small faraway country about which they know nothing," a senior official in the region wrote in a despairing email after The Daily Telegraph broke the news on Friday.

European unity after the war in Georgia was never terribly impressive – a mild public rebuke and the suspension of talks on a new "partnership and co-operation agreement" until Russia met the conditions of the loosely worded truce brokered by the French president, Nicolas Sarkozy.

Russia has met some of those conditions – but not all. EU monitors are still unable to inspect the war zone properly. If they could, they would see evidence of ethnic cleansing in the two separatist enclaves of South Ossetia and Abkhazia. They would also see that Russia has increased its military presence. The message to the Kremlin is clear: you can invade a neighbouring country, threaten Europe's energy supplies, and the EU will do nothing serious about it.

The reason is simple: Gordon Brown cares little about foreign affairs, but likes the idea of stitching up deals on the reform of international finance with his new friend Mr Sarkozy. France, which is running the EU until the end of the year, wants a triumph to present to the European summit in Nice this month. Showing that it has repaired relations with Russia is part of that. It will please all the pro-Russian countries in the EU. Russia's energetic cultivation of contacts in Germany, Italy, the Netherlands, Austria and France has built up a bridgehead of influence. Those in Whitehall who watch with alarm and disgust as parts of our establishment cosy up to rich and powerful Russians have been outmanoeuvred. The idea that the start of talks is balanced by a new, careful scrutiny of EU-Russian relations should fool nobody. This is surrender.

It must be especially humiliating for David Miliband, whose condemnation of Russia's actions, in a speech in the Ukrainian capital Kiev on August 27, inspired hopes from the Baltic to the Black Sea that Britain was now a champion of the ex-communist countries' freedom and security. He excoriated Russia's "unilateral attempt to redraw the map", calling it "the moment when countries are required to set out where they stand". This week's decision casts those words in a bitter light.

It is also part of a wider and gloomier picture. Even before the war in Georgia in August, Russia was bullying its neighbours, stitching up Europe's energy market and turning money into power across the continent. In the old Cold War, the Kremlin was shackled by communism. Now it has been turbo-charged by capitalism, through the boom in oil and gas prices that has brought it 
$1.3 trillion in extra revenues since 2000. That enables it to exercise influence not only on us, but among us, too. It has built up assets, commercial and human, in positions of power across Europe. German industry makes tens of billions of euros in the Russian market; Russia is Germany's main energy supplier. The former German chancellor Gerhard Schröder chairs the consortium building a Russian-German gas pipeline (conceived, in secret, while he was still running Germany).

Even though the EU is far stronger than Russia on paper, three times bigger in population terms, and more than 10 times larger as an economy, it seems unable to stand up to the Kremlin. The financial crisis has hit Russia hard – but it has hit us harder. A few years ago, threatening to freeze dodgy Russian companies out of the developed world's capital markets would have been a real threat. Now, if they find London, New York, and Frankfurt unwelcoming, they can turn to the exchanges in Dubai, Mumbai and Shanghai.

Nor does Russia greatly care if it is excluded from clubs such as the Council of Europe or the G8, or if talks on joining the World Trade Organisation or the Organisation for Economic Co-operation and Development are frozen. Such "punishments" may even reinforce the message of the ex-KGB regime to the Russian people: that their country is surrounded by malevolent hypocrites. The Kremlin's message to Europe is cold and confident: you need us more than we need you. President Dmitri Medvedev is proving as tough and tricky as his predecessor, Vladimir Putin. His new security plan is to end the Atlantic alliance, pushing America out of Europe and creating a new security regime in which the continent's biggest countries – chiefly Germany and Russia – will boss everyone else about.

It is not too late to fight back. Nato has already changed its approach. Belatedly, the alliance's top-secret military planning bureaucracy is working out how it could defend the Baltic states and Poland. Nato warplanes last week held air exercises over Estonia, while senior American commanders are paying frequent visits to the Baltic states.

That is encouraging, but it is not enough. There are other matters that need addressing urgently – including Russian spying. This has reached unprecedented levels, and is probably more dangerous and destructive to Western interests than during the old Cold War. A co-ordinated, wholesale expulsion of Russian intelligence officers and their hangers-on from, say, London, Stockholm, Oslo, Copenhagen and Warsaw would send a powerful message to the Kremlin.

The key to the West's future security is the security of the Baltic states. Estonians, Latvians and Lithuanians have thrown in their lot with us and we must not let them down. Consider this scenario. Imagine that Estonian extremists start intimidating local Russians (who amount to around a third of the Estonian population). Russia can easily stoke this covertly, while demanding publicly that Estonia crack down. Then imagine that Russian activists (again, backed, discreetly, by Moscow) set up "self-defence units" which start patrols, and set up checkpoints. When the Estonian authorities try to stop this, the Kremlin complains; Russian military "volunteers" start mustering across the border, proclaiming their intention to defend compatriots from "fascism". The Russian media report this with wild enthusiasm; the Russian authorities say they cannot indefinitely restrain the spontaneous patriotic sentiments of their citizens.

Suppose Estonia requests support under Article IV of the Nato charter. At this point, Russia's cultivation of assets in the West pays off. Germany, Italy and other big European countries tell Estonia to sort out its problems with Russia bilaterally. The result is a worse split in the Alliance even worse than the one over Iraq. Faced with the West's weakness, the Kremlin ups the odds. Estonia tries to restore order; Russia terms that an intolerable provocation and demands a change of government, immediate changes in the language and citizenship laws, and the establishment of what it calls a "Swiss solution": cantons in which Russians will be allowed "to run their own affairs". To back this up, Russian forces start military manoeuvres.

So what does Estonia do then? America may offer moral support, but is it going to risk a Third World War with Russia to protect Estonia? Such a course of events is not inevitable, or even likely. But it is not as preposterous as it should be. Too many of the ingredients are in place and the Kremlin is perfectly capable of cooking them into a dangerous dish. The big question for Estonia and its friends is what can be done to make sure that never happens.

The answer is not to give up on Nato but to complement it with a regional grouping. The existing Nordic ties between Sweden, Norway and Finland, boosted by support from Poland and Denmark, would put this scenario back where it belongs: in the world of geopolitical thrillers. Add in British, Canadian and American involvement and you would have a formidable counterweight to Russian mischief-making in both the Baltic and the Arctic – the likely hotspots of the new Cold War.

Edward Lucas is author of 'The New Cold War: How the Kremlin menaces both Russia and the West' (Bloomsbury). An updated edition is published thismonth.

Why the Baltics should chill out, not heat up (Europe view no 99)

Europe.view

Keep calm and carry on
Sep 18th 2008
From Economist.com


Giant spiders will not attack Estonia—official

THE Baltic states are full members of NATO. In theory, that means they need worry about external threats no more than any other NATO member. If they come under threat from, say, Russia, they are entitled to exactly the same protection under Article IV (political support) and Article V (military support) as any other country in the alliance.

But viewed from Estonia, Latvia and Lithuania it doesn’t quite feel that way. Baltic officials have been privately and semi-publicly urging NATO to increase its visible presence in the Baltic states, both in terms of planes, ships and soldiers, and through high-profile visits. If the response is cool, they question the alliance’s resolve.

It is true that the permanent NATO presence in the Baltic consists merely of a few warplanes, provided on a rota by NATO countries that, unlike the Baltics, have real air forces. NATO contingency-planning regards any military danger from Russia as a taboo (after all, Russia is a friend, isn’t it?). So formal threat-assessment gives no basis for the alliance to plan how to reinforce its north-eastern members.

All that is going to change, slowly. NATO’s “Military Committee 161,” which deals with threat assessment, will shortly consider how to rejig the bureaucratic basis for military planning. Other work is already under way.

But there is little to be gained, and much to be lost, by panicky talk in the Baltics about the need for more NATO support. It creates the potentially dangerous impression that the Baltic states are “lite” members of NATO. The alliance’s secretary-general, Jaap de Hoop Scheffer, said rightly last week in Riga that there was no need to show “special solidarity” or create extra “NATO bases”: every Latvian military base was a NATO base, he noted.

The biggest threat to the Baltic states right now is not military, but psychological, as questions that should be ludicrous are treated seriously. Estonia’s media has been in a flap about a book to be published next week about the Bronze Soldier affair of 2007 (when the clumsy move of a war memorial from central Tallinn to a military cemetery prompted a night of rioting and splenetic Russian reaction). The book, by a Finnish author called Johan Bäckman, says that as a result of this, Estonia will be part of the Russian Federation within ten years. Perhaps. But perhaps Estonia will be swept away by a tsunami or colonised by giant spiders. Giving the book front-page treatment, albeit highly critical, suggests that the editors privately think its thesis is plausible.

Another flap illustrates the danger of over-reacting to such pokes. A smattering of Estonian farmers have supposedly (according to a dubious Russian news source) pledged loyalty to a restored “Estonian Soviet Socialist Republic” on the grounds that “bourgeois Estonia” is a country “where nobody cares about the common people . . . with raging unemployment and corruption, and everything depends on NATO and the Americans.”

That was picked up by the international media and appeared in sober news outlets such as the Denver Post. In a sense the story is just meaningless fluff. But it is worrying that anyone took it seriously at all: a similarly ludicrous story elsewhere—say a few South Tirolean farmers saying that they wanted to restore the Hapsburg empire—would have scarcely merited a line.

The best defence for the Baltic states is to steer their economies safely through the global downturn, to clean up corruption, and to make their fractious and sometimes opaque political systems work better. As far as Russia is concerned, impassive calm is, for now, the best approach.

From the new Standpoint magazine

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Putin's New Evil Empire

EDWARD LUCAS

Few things make the bien pensants more uneasy than talk of right and wrong. They flinched when Ronald Reagan called the Soviet bloc, rightly, the “evil empire”. Sometimes that fastidiousness was simply based on wilful ignorance. Reports of Stalin’s terror, the Gulag, persecution of dissidents or the bullying of the captive nations were dismissed as tendentious or inaccurate. More often it was based on a feeling that the West’s own shortcomings were so appalling that we were in no position to judge anyone else. Amid the ruins of communism in Czechoslovakia in late 1989, I sat through an excruciating dinner with my then foreign editor where I explained that the Czechs wanted to become a “normal country”. He couldn’t share my enthusiasm. “What’s ‘normal’ about Britain?”, he asked scornfully — a country where mounted police charged striking miners, where a quarter of the population lived in poverty, and where you could be locked up for a decade just for having an Irish surname.

Yet the Czechs were right, and my distinguished boss, whose liberal conscience was tingling so painfully with the shortcomings of Mrs Thatcher’s Britain, was wrong. Their enthusiasm for welfare capitalism and political freedom was based not on a naive belief that everything we had was wonderful, but a realistic appreciation: when things went wrong in communist countries, you were powerless. In Western countries, you had a chance, either through politics, the law, or the media, to get something done about it.

I was reminded of this at another dinner last February in London, where a frail but determined Baroness Thatcher enjoyed a lengthy standing ovation from hundreds of Lithuanians gathered to celebrate the 90th anniversary of their country’s founding. The Lithuanian ambassador to London, Vygaudas Usackas, with a moral clarity and historical perspective that are seldom found in our own diplomatic service, explained eloquently how Mrs Thatcher’s tough talking had given hope to him and three million other Lithuanians, a captive nation in the Soviet empire. The Iron Lady beat the Iron Curtain. She may be the object of easy derision on the London stage and at the dinner table, but to those who tasted totalitarian rule, she is still a heroine.


If the political elite in the West found it hard to grasp that the old Cold War was a struggle of good against evil, they find it almost impossible to understand the moral dimension of what is going on now, particularly with regard to Russia. Readers will need little to remind them of that country’s descent into autocracy at home and bullying abroad. The events—it would be unfair on countries with real political freedom to call them “elections” — of December and March produced a sycophantic legislature and a docile successor, Dmitri Medvedev, in the Kremlin. But it is clear that real power will stay with the man — and the system — that has ruled in Russia for the past nine years.

Vladimir Putin has moved from being president to prime minister. He is also chairman—I nearly wrote General Secretary—of the ruling party. Together with his ex-KGB colleagues, he presents a profound challenge to the West, and never more so than now. Our economy is slumping just as theirs is booming. The idea that economic prosperity depends on political freedom seems to have been exploded. Russia has a system of authoritarian bureaucratic capitalism that at least on the surface seems to deliver the goods: high living standards, decisive leadership, and none of the messy complications of Western-style electoral democracy and separation of powers.

Even when the real shortcomings of the Kremlin’s crony capitalist system are pointed out, we in the West flinch from telling it like it is. So Russia’s economy and politics are distorted, monopolistic and corrupt? Surely that’s just like Italy — particularly with Mr Putin’s chum Silvio Berlusconi back in charge. So Russia incarcerates dissidents in psychiatric hospitals? Well, America has flung the innocent into the prison camps of Guantánamo Bay.

It is certainly true that the worst aspects of the Russian system are often a concentrated form of our own worst shortcomings. Indeed, the West has largely lost the moral authority that it enjoyed during the last Cold War. Once it was the Russian elite who feared us, and ordinary Russians who admired us. Now the elite despises us for our corruption and weakness, and ordinary Russians see little difference between one lot of rulers and another.

But just because we have many flaws does not mean that we are always wrong, or that somewhere else can’t be worse. Without some kind of moral self-confidence in our own system, we cannot defend it: we are in the same position as the kind of leftwingers who believe that mugging is a political action by the poor against the rich. The squirming reaction to the praise lavished by Nicolas Sarkozy on Britain’s dynamism, efficient institutions and deep historical traditions was a good example. His audience were so used to moaning about Britain’s crowded, vulgar, discredited (fill in blanks from either The Guardian or Daily Mail leader columns according to your choice) that they could hardly believe that a foreigner was coming here to tell us that we had something to be proud of.

Moral timidity is a gift to Kremlin propagandists. During the Cold War they were trained to use a technique that I dubbed “what-about-ism”. Any criticism of the Soviet invasion of Afghanistan, martial law in Poland, political persecutions or censorship was met with a “what about” apartheid South Africa, (or trade union rights, American-supported dictatorships in Latin America, etc, etc).

Now they have a much easier job. Communism was a hard sell. Not only did it demand huge sacrifices of freedom, but it didn’t work. The painful truth for the Kremlin’s lie-mongers was that workers in the Soviet Union lived worse — a lot worse — than their counterparts in America. The crony capitalism of modern Russia is much less distinctive. And — lethally for us — it is highly tempting for the rich, powerful and unscrupulous elsewhere. That is particularly true now that the regime has taken some of its most sinister ex-KGB types out of the front line, and promoted the quiet, lawyerly Mr Medvedev. On close scrutiny, his well-honed phrases about liberty and the rule of law sit ill with the lawlessness and repression at home. But they are a perfect sugary coating for the bitter pill that the Kremlin wishes us to swallow: the Finlandisation of western Europe, and the recovery of its old eastern Empire.

The clearest example of this has been the Kremlin’s success in suborning Germany, once a pillar of the Atlantic Alliance and now almost Russia’s closest ally in Europe. During the old Cold War it would have been inconceivable that a serving German chancellor, in his last weeks in office, would have signed off a loan guarantee on a controversial Kremlin-backed energy project that directly threatened Europe’s collective security. It would have been even less conceivable that, having left office, the same German politician would then take a lucrative job as chairman of that project.

Yet that is exactly what Gerhard Schröder, the successor to such giant statesmen as Konrad Adenauer and Willy Brandt, did in 2005, with the Nord Stream pipeline. This will take gas along the Baltic seabed directly from Russia to Germany, bypassing the countries in between (and thus making them vulnerable to energy blackmail). Even more shocking is that the German government of Angela Merkel has been unable to derail the project.

Worse, at the Nato summit in Bucharest in early April, it was Germany that blocked the chances of Ukraine and Georgia taking the next step towards Nato membership. Never before had the divisions in Nato been so cruelly — and dangerously — exposed. A compromise was cobbled together to disguise the split; but the damage had been done. When push comes to shove, Germany cares more about pleasing Russia than America. Now Georgia is paying the price, as Russia moves swiftly to annex, in effect, the breakaway provinces of Abkhazia and South Ossetia. These two statelets have been Russian puppet states for 15 years. The pro-Western government in Georgia is humiliated; those in it who have argued for a peaceful approach to the separatists are undermined. And as the Kremlin flexes its muscles, the absence of any protest from Europe is painfully apparent.

That exemplifies one of the most successful tactics adopted by Vladimir Putin and his ex-spook sidekicks. He has successfully built up the Kremlin’s influence not only on the West, but also in the West. The growing business lobby tied to Russia represents a powerful fifth column of a kind unseen during the last Cold War. Once it was communist trade unions that undermined the West at the Kremlin’s behest. Now it is pro-Kremlin bankers and politicians who betray their countries for thirty silver roubles.

Nobody in Britain has any reason to get on a moral high horse where Germany is concerned, given the behaviour of our own commercial and financial elite. If someone turned up in the City of London with a suitcase full of Fabergé eggs purloined from a Russian museum, it is hardly likely that the slickest investment bankers, sharpest lawyers and smoothest PR firms would compete for the business of selling them in a legal and uncontroversial way. (At least I hope not.) But when Russians turn up with a stolen oil company, such as Rosneft, the story is quite different. Having gobbled up the eviscerated remains of Yukos, a company largely owned by Western shareholders, Rosneft came to London and successfully listed its shares, with barely an eyelid batted among the pinstriped accessories to the deal.

That sort of behaviour makes it much harder to draw a line between the law-governed liberty of the West and the lawless greed of Vladimir Putin’s Russia. Why bash Russia when Germany is just as bad? The West is open to criticism that it uses double standards; even that it is racist. Why are we so hard on the behaviour of countries that dare to be assertive in their foreign policy (i.e. Russia) while overlooking those that play the Western game (i.e. Italy)?

It is that question which is now the central “ideological front” of the new Cold War. Does the West really believe in its own values? Do its rulers feel any sense of shame? And do voters mind? The broad path downwards is tempting. We will become more like Russia. Our rulers dip their snouts in the trough, paying lip service to conflict-of-interest rules, soaking up expenses and bribes while in office, and looking forward to lucrative directorships afterwards. Voters regard politics as a mildly entertaining soap opera, but lose any sense that it makes a difference to their daily lives. Public-spiritedness becomes a mugs’ game. Voting is something you do with your wallet and your feet. If politicians muck us about too badly, we stop paying taxes or move abroad. As public services fray, we go private. The rule of law remains, at least in theory — a ghostly reminder of a nobler age.

That is the broad path down, but a narrow and rugged way back to moral ascendancy is there, if we choose to tread it.

It requires first of all a clear understanding of the historical and geographical context in which we articulate our views. Stalinism, for example, should not be regarded as some distant abstraction, as irrelevant to modern-day politics as the Bismarckian militarism of 19th century Prussia. It is a powerful and toxic force that modern Russia has yet to confront. The fact that Vladimir Putin regards the Molotov-Ribbentrop Pact as lawful is not some curious historical footnote. It is as outrageous as if a German chancellor were to maintain that the Munich agreement on the dismemberment of Czechoslovakia had been “just another treaty”. Our ahistorical, optimistic age finds that difficult to grasp. Politicians with a strong sense of history are rare. “That was then, this is now” is an easy retort to those who raise the whiskery problems of the past.

A degree of historical amnesia is a necessary lubricant in politics. The postwar rapprochements between France and Germany, or more recently between Britain and Ireland, would not have been possible if either side had stuck rigidly to a script featuring past historical wrongs. But that presupposes goodwill. Germany and Poland get on pretty well — but it took Willy Brandt’s genuflection in Warsaw in 1970 to dent the Polish conviction that nothing could be forgotten or forgiven. Nobody should rub modern-day Russians’ noses in the Katyn massacre, or the mass deportations from the Baltic states to Siberia of 1941 and 1949. But the quid pro quo is that Russians do not speak of those years with pride or nostalgia.

Secondly, we have to be a lot blunter about what we are doing and why we are doing it. Why do we accept the language and citizenship policies in Estonia and Latvia, which the Kremlin portrays, now with increasing vehemence, as a discriminatory blot on the West’s record? Why do we think Kosovo deserved to be independent, while Transdniester (a breakaway region of Moldova) doesn’t? Is it solely because the Kosovan leadership is pro-American and the separatists in Transdniester are Lenin-loving Soviet holdovers? If so, it is hardly surprising that Russians and others think we are being hypocritical.

The answers to these questions are good ones, but too often understated. Estonia and Latvia have certainly inflicted some injustice on the Soviet-era migrants stranded on their territory when the empire collapsed. They must pass a language test if they want to become citizens of the reborn countries. That policy was unsettling, upsetting, and to some extent unjust; and this needs to be bluntly acknowledged. But it would have been an even greater injustice to have expected those much abused countries to give instant citizenship to a population still largely loyal to the old Soviet order, or to have allowed the russification policies of the past decades to become a new status quo. An honest Western policy would say this — and also point out that the Russians living in the Baltic states now enjoy far more political freedom and much higher living standards than their compatriots in the Motherland. Russia does not like that to be said, which is one reason why nobody says it. But it is still true. Our policy was tricky, but both right in principle and successful in practice. Such things deserve to be advertised, not mumbled.

Similarly with Kosovo: the truth is that we think that Europe’s “soft imperialism” gives us a chance of making a go of it. It is not just the thousands of lawyers and police — the continent’s most ambitious colonial adventure for decades — that the European Union is sending to give the new-born state a semblance of law-governed rule. It is also that Kosovo (and Serbia) have reservations on that clunky, puffing rattletrap of the enlargement train. EU expansion rarely gets the plaudits it deserves. It is easier to highlight the bad side-effects: unsettling migration, growing criminality, bad government and corruption. But overall it has been a stunning success, spreading freedom and security to tens of millions of people. For all its faults, Europe has a great deal to be proud of in the way it treats its citizens — nowhere else in the world do so many people enjoy such liberty or such good public services. And it is all the more commendable that this sphere of good-ish government is spreading east.

By contrast, Russia has nothing except cheap gas to offer tinpot statelets like Transdniestria. However muddled, ineffective and hypo­critical the EU is in its influence on what it calls the “European Neighbourhood”, it is incomparably better than the thuggishness and mischief-making that are the hallmark of Kremlin policy in its former empire. We do not want Transdniester to become independent, because it will be like Russia. We do want Kosovo to be independent, because it will eventually be like us. Again, that is a blunt message, but one better spoken proudly than left unsaid.

Historical perspective and plain speaking are only part of the story. Real success will come only when we strengthen our own moral ­authority. That requires the West to become both more self-critical and more self-confident. On the face of it, that is a conundrum. In fact, it is the extent and effectiveness of self-criticism that distinguishes us from the authoritarian societies to the east. And it is on this that our self-confidence should rest. That is a task not just for politicians, but for everyone. Our cause — and our future — are corroded by bad government, apathetic citizens, sloppy journalists and, most of all, those who scoff at the very notion of right and wrong. If we do not use it, we will lose it.

Copyright © Social Affairs Unit Magazines Limited 2008

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